Tapping home equity for the holidays

Should you use your home equity in place of a Christmas club account?
It depends upon how responsible you are.

Experts in personal finance agree that you should buy gifts with
cash instead of buying them with credit.

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"Of course, cash is always king," says Rudy
Cavazos, spokesman for Money
Management International, which runs credit counseling agencies
in states from California to Maine. "The best way to holiday
shop is to tap into money you set aside for Christmas shopping in
some sort of savings account."

Many credit unions and banks offer Christmas club
accounts, in which customers set aside money from every paycheck.
The money goes into accounts which the customers tap during the
holiday gift-giving season. The accounts are useful not only because
they enable customers to buy gifts without going into debt, but
also because they force people to draw up gift-giving budgets.

Having a budget, naturally, is the key to not overspending for
gifts, as long as you have the discipline.

Certainly, many conscientious people follow that gift-buying advice,
just as many disciplined diners eschew overeating during the holidays.
The rest of us plunk down credit cards at every counter and pig
out at every party.

Inexpensive borrowing optionAssuming that you don't pay cash for all the
gifts you buy, the best thing to do is borrow the money using the
lowest-cost credit you can find. If you own a home and have a home
equity line of credit, that's probably the cheapest source of credit
that's available to you.

Is it prudent to use home equity for the holidays?

"Prudent?" echoes Anthony Hsieh, president of HomeLoanCenter.com.
"No. But is it done? Yes. It all comes out to the discipline
of each individual borrower."

As Hsieh mulls over the subject, he warms to the idea of using
home equity to buy gifts, sort of. As he thinks out loud, he arrives
at three propositions. First, it's better to pay cash for gifts
instead of going into debt. Second, if you decide to go into debt
anyway, "figure out what your budget is and when you're going
to pay it off."

Third: "Consumers should always look at the cheapest source
of borrowing. If you borrow, you need to look at the cost of borrowing
that money over the length of time you believe you will be carrying
the debt."

In most cases, a HELOC is a borrower's cheapest source of money.
The average rate on HELOCs is around 4.8 percent. Interest paid
on home equity debt usually is tax-deductible, so the effective
interest rate is even lower. That probably beats any credit card
that you have, unless you have a super-low introductory rate on
purchases.

A no-brainer, but ..."I don't think anyone should spend indiscriminately,
beyond their means," says Bob Walters, vice president of Quicken
Loans. "That said, if you have a choice to pay 14 percent
credit card debt or put it on 4 percent, deductible, home equity,
it's an easy choice. The premise is that you'll be paying that down."

Different lenders have different rules for their lines of credit.
Usually you can access a HELOC through a credit card or a specially
issued check. Many lenders require you to withdraw a minimum amount
each time you draw from the account. Depending on the lender's rules,
you might be able to charge each purchase on the equity line, or
it might be more feasible to charge everything to credit cards,
then pay off those cards immediately with convenience checks from
the equity line.

After that, pay off the debt as fast as you can.

"We know that people are still going to use credit cards at
this time of year," Cavazos says with a mild air of resignation.
"We recommend that you set up a plan to pay off these Christmas
purchases in 30 days -- 60 days max -- so you're still not paying
for Christmas gifts in May and June."

If you are still paying for the previous year's holiday gifts in
the middle of the year, it's a good idea to change your perspective.
Instead of paying for the previous year's gifts in May and June,
try paying for the current year's gifts in May or June. Start holiday
shopping in shorts-and-sandals season. "Sock gifts away in
the closet," Cavazos says. "This is an effective way not
to overspend during the holidays."

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